The True Cost of Travel

by Terry Ward 
Posted Dec 23rd 2010 02:43 PM

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The True Cost of Travel

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If you've ever paid for your luggage to have a spot in the cargo hold or agreed to a surcharge for the pleasure of booking a window seat, the question has certainly come to mind: What exactly are you paying for when you purchase an airplane ticket?

According to Bureau of Transportation data and an AOL report, the airlines nabbed nearly $2.6 billion in revenue in the form of baggage fees in the first three quarters of 2010.

And while it's not as obvious what you're paying for when you buy a ticket (other than getting from point A to point B, of course), industry experts can help shed some light on the pieces that make up the true cost of travel.

Jeffrey Breen, president of Cambridge Aviation Research, a Massachusetts-based company that provides custom research and analysis to select industry clients, says that roughly half of an airline's operating costs -- and in turn, half of your ticket price -- go toward fuel and labor, the latter of which includes the pay for flight personnel, maintenance labor, traffic-handling personnel, etc.

With this in mind, says Breen -- and operating under the assumption that a Los Angeles to New York flight (one way) is about 85 percent full these days -- passengers can expect that the price of their individual ticket covers roughly 30 gallons of jet fuel for the cross-country trip aboard an Airbus 320. At a rate of about $2.30 per gallon, that comes to roughly $70 of your ticket price going toward the gas to get you there, says Breen. "Either bring seventy bucks or thirty gallons to the gate," he quips.

Where food and beverages are offered on a flight, he says, associated operating costs were only 1.5 percent in the second quarter of 2010, "so no airline is saving itself by getting rid of cans of soda."

But it's clear to see where airlines are making much of their money these days.

The megatrend for the last few years, says Breen -- and a place where airline customers are feeling hardest hit -- has been the addition of ancillary fees covering everything from baggage and food to more comfortable seats.

"In aggregate, the revenues collected through these ancillary fees are eerily similar to the total industry profit," he says. US Airways, which charged $500 million this year in fees for everything from ticket changes and baggage fees to onboard sales, is expected to rake in profits of between $450 and $475 million, according to Wall Street analysts.

Seeing how -- and where -- these fees add up is rarely an easy task.

Charlie Leocha, director of the Consumer Travel Alliance, is dedicated to pressuring airlines to make these fees more transparent.

"Especially dealing with airlines, the fees that passengers are being charged basically have nothing to do with what it actually costs the airline to provide the service." says Leocha, "The airlines get away with these fees because there's no effective way to fight them. All the airlines do it together and move in a monolithic sort of way, so passengers are basically at the mercy of the airlines."

The True Cost of Travel

The bulk of what passengers pay for an airplane ticket goes towards fuel; Dave Heuts. flickr

Leocha uses the arbitrariness of baggage fees as an example.

"Everyone knows that to ship a bag from New York to L.A. costs more than to ship it from New York to Chicago, because it's a longer distance," he says. "But airlines tell us it costs the same amount of money (by charging the same fee regardless of distance flown). It just makes no sense, because they are charging one single price across the country."

And the fact that we don't get charged at all to check a piece of luggage for a flight from New York to Paris, he says, makes "all their economic arguments go out the window."

"I think most passengers feel that airline fees are the new normal," says Leocha. "And while we feel like we have to live in the real world where airline fees are the new normal, we don't have to live in a real world where the airlines can hide the fees from us and surprise us at the airport with these fees."

And while nobody argues that the airlines, like any business, deserve to make a profit, part of being an educated consumer is realizing how they make that profit.

"Airlines operate on only a few percentage points of profit, and the addition of even small high-margin services like food, WiFi, or a few people upgrading their seats can have a disproportionately large impact on the profitability of an actual flight," says Matt Johnson, a partner with Simon-Kucher & Partners, a strategy and marketing consultant firm in Mount View, California.

Johnson references Bureau of Transportation statistics to determine how much of a company's cost of leasing or purchasing its airplanes goes toward operating costs -- the number comes out to roughly 31 percent for low cost carriers and 41 percent for legacy carriers, he says.

"For airline passengers, the bulk of what you are paying for on an airplane is for the fuel, the crew salaries and the plane, whether the airline bought it or leased it," says Johnson. And the operating cost structure for hotels and cruise lines, he says, are similar.

"For hotels and cruise lines it's the same thing -- buying the boat or the building is really expensive," he says. "They have to pay fixed costs, but they are constantly adding to those assets. That's a big chunk of the costs."

"The cost to clean a room and fluff a pillow each night is not nearly as high as heating the room, insuring it, buying it -- everything to do with a building," he says.

Leocha advises consumers to be aware of the "slow creep of resort fees," which he calls one of the "really big, growing problems in the hotel industry."

"These are fees that you don't see when you go onto any of the hotel sites. You don't see them on the actual hotel site, don't see them on the travel agency site, on Expedia or Priceline," he says. "Most people find out about the resort fees when they get to the hotel."

"And while hotels present resort fees -- which often cover things like Internet, pool towels and a daily newspaper -- as a convenience to the customer," says Leocha, "the only problem is that if you don't want to include any of those items, you still have to pay the resort fee."

"Consumers need to ask whether there is a resort fee, look for it. It's normally written somewhere in the fine print on the website, it's something else consumers need to look for," he says, adding that resort fees are now moving from where they originated, in luxury hotels, into more mainstream properties, too.

Like Loecha, Breen places much importance on making fees more transparent. But he has this advice for the price-conscious traveler.

"You can drive yourself crazy, going shopping online, and trying to figure out how much everything costs," he says. "You can't cover everything -- how much things are manufactured for, how much it costs to ship it to you, how much goes into packaging and advertising."

And overall, when you take into account inflation over the years, flying is still an amazingly affordable form of transport, Breen says. "Anyone who for any reason refers to the good old days of regulation really needs to spend some time with some old airfares, inflation and a calculator," he says.

All those extra charges can really add up. Check out our table of airline fees, arranged by carrier.

Filed Under: Air Travel

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